SHANGHAI, July 16 (Reuters) - A crackdown in China aimed atcurbing distorted credit growth has triggered growing demand forthe use of commodities as collateral to raise cash, causingdistortion of another kind in the international trade of copper.

China's copper imports rose to a nine-month high in June andare likely to stay strong through the third quarter on growingdemand for using copper-backed financing as a cheaper and moreaccessible alternative to bank borrowing.

Financing demand led copper imports into China in June tobuck the wider trend of falling shipments in industrial rawmaterials as economic growth slowed. In contrast to copper, thevolume of iron ore and crude imported into the world'ssecond-largest economy fell from the previous month.

New rules to control credit growth have encouraged demandfor copper for collateral for financing, partly by making banksand firms hold the physical metal. Companies have also turned tothe practice after being blocked from other credit sources.

China is the world's top consumer of copper and more importsflowing into financing are offsetting soft industrial demand forthe metal and lending some support to weak global prices, whichhave dropped 14 percent so far this year.

"Demand for copper financing will continue to stay robust inthe third quarter since credit in China will remain tight. Banksmay be told to lend more to the small and medium-enterprises,but that won't happen because banks want to manage risks," saidLian Zheng, a copper analyst at Xinhu Futures.

"If the arbitrage for imports remains attractive, we may seestrong imports for the rest of the year."

Since the imports are not actually consumed, they inflateChina's copper demand and yet remain in storage, an overhang that would pressure prices if copper financing is unwound.

The use of copper for financing could undermine what iswidely regarded as Beijing's most drastic credit clamp down intwo decades to rein in shadow banking networks fuelling lending.

"Because of the latest liquidity crunch, we've actually seenmore companies come to us and say they are interested in copperfinancing," said Jing Chuan, chief researcher at Citic Futures.

For the broader economy, the persistence of China's 'cashfor copper' financing scheme underscores the difficultiesBeijing face in controlling the grey credit market.

The International Monetary Fund has said that shadowbanking, which the People's Bank of China estimates to accountfor over 20 percent of total outstanding loans, as one of thekey risks in China's increasingly complex regulatory system.

MORE COPPER

Copper is dollar denominated, so importers can obtain loansat lower interest rates than yuan loans by using the metal ascollateral. To get the cash, importers pay a small percentage ofthe value of the metal upfront and get bank credit for the rest.

The bank then pays for the copper. The importing firm sellsthe metal and can invest the cash where it wants until it has torepay the credit to the bank, usually six months after issue.

One of the areas that Beijing has targeted is credit tofirms involved in buying and selling of goods in bondedwarehouses in China's tariff-free areas.

Banks have also shortened the repayment period to 90 daysfrom six months and are demanding higher loan deposits of 20-30percent for some smaller firms, up from 10 percent previously.

But for large companies, it is business as usual. Thosefirms are acting as intermediaries for some of the small firmsthat are struggling to gain access to credit.

"The new regulations have made it more expensive to gettrade loans," said Standard Charted analyst Judy Zhu.

"But it will not stamp out copper financing because it isalmost impossible to determine which are proper trading firmsand which are investors using copper imports as a way to profitfrom various arbitrage."

Banks are said to be encouraging the trade, as the loans areoff the balance sheet and allow them to circumvent Beijing'smonthly lending quota.

"We have bank managers explaining to us how we can make moremoney via interest rate or foreign exchange differentials or howwe can invest the money in their financial products for quickcash," said a manager at a local copper trading firm.